A few weeks ago, The Federal Executive Council (FEC) which is made of the President, Vice president, ministers & representatives of parastatals, agreed to increase the Value-added Tax (VAT) rate from 5% to 7.2%. However, the new rate still has to be approved by the National Assembly and state governments.
What this means
VAT is a tax applied to a product whenever any value is added, including in its production and final stage. This affects every item you can think of except essential items such as food, medicine, educational materials and other essential items. Because the burden of Tax is usually transfered to the buyer, the price of items not exempted will increase.
Why it matters?
VAT brought in ₦1.090 trillion in government revenue for 2018, an increase by 44% should see government revenue increase by almost ₦500 billion if other things remain equal.
NLC argues that the VAT rate increase is the government’s way of taking away the financial benefits of the new minimum wage which increased from ₦18,000 to ₦30,000.
The solution to more revenue might not be in increasing VAT but instead in increasing the number of people who pay VAT.
This is because there is a huge gap between registered and active taxpayers in Nigeria. Out of 1 million registered corporate taxpayers, only 56,000 were active in 2016. And of 1.5 million registered VAT taxpayers, only 77,000 were active.
As Stears Business rightly suggested, It’s advisable that Nigeria focuses more on the number of taxpayers, than the amount paid by each taxpayer.